{"id":785,"date":"2022-09-24T07:15:33","date_gmt":"2022-09-24T07:15:33","guid":{"rendered":"https:\/\/mpelembe.net\/?p=785"},"modified":"2022-09-24T07:15:33","modified_gmt":"2022-09-24T07:15:33","slug":"mini-budget-will-kwasi-kwartengs-plan-deliver-growth","status":"publish","type":"post","link":"https:\/\/mpelembe.net\/index.php\/mini-budget-will-kwasi-kwartengs-plan-deliver-growth\/","title":{"rendered":"Mini budget: will Kwasi Kwarteng\u2019s plan deliver\u00a0growth?"},"content":{"rendered":"<p><span><a href=\"https:\/\/theconversation.com\/profiles\/steve-schifferes-181051\">Steve Schifferes<\/a>, <em><a href=\"https:\/\/theconversation.com\/institutions\/city-university-of-london-1047\">City, University of London<\/a><\/em><\/span><\/p>\n<p>The UK economy has been dogged by <a href=\"https:\/\/data.worldbank.org\/indicator\/NY.GDP.MKTP.KD.ZG?locations=GB\">slow growth<\/a> for a long time. Combined with even slower growth <a href=\"https:\/\/theconversation.com\/inflation-theres-a-vital-way-to-reduce-it-that-everyone-overlooks-raise-productivity-183938\">in productivity<\/a>, it has meant virtually no increase in living standards for the average family over the past decade. <\/p>\n<p><!--more--><\/p>\n<p>Now the new chancellor, Kwasi Kwarteng, has unveiled what he says is a radical plan to get growth back to its historic average of 2.5% per year. This would be an increase of about a percentage point, lifting living standards and providing more money for public services. <\/p>\n<p>The central part of Kwarteng\u2019s <a href=\"https:\/\/www.bbc.co.uk\/news\/business-63007219\">mini budget<\/a> involves cutting taxes in the hope of providing greater incentives for individuals and businesses to work harder and invest more, in what are the biggest net tax cuts from a chancellor since the early 1970s. <\/p>\n<p>Much of this will benefit the better-off more than those on lower incomes, but the government argues that higher growth and not redistribution is the priority, and that this will benefit everyone as the economic pie becomes bigger. So will this work?<\/p>\n<p><strong>Net tax cuts of UK chancellors<\/strong><\/p>\n<figure class=\"align-center zoomable\">\n            <a href=\"https:\/\/images.theconversation.com\/files\/486318\/original\/file-20220923-10743-gnurwo.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip\"><img decoding=\"async\" alt=\"Chancellors and tax cut amounts\" data-src=\"https:\/\/images.theconversation.com\/files\/486318\/original\/file-20220923-10743-gnurwo.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip\" data-srcset=\"https:\/\/images.theconversation.com\/files\/486318\/original\/file-20220923-10743-gnurwo.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=426&amp;fit=crop&amp;dpr=1 600w, https:\/\/images.theconversation.com\/files\/486318\/original\/file-20220923-10743-gnurwo.png?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=426&amp;fit=crop&amp;dpr=2 1200w, https:\/\/images.theconversation.com\/files\/486318\/original\/file-20220923-10743-gnurwo.png?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=426&amp;fit=crop&amp;dpr=3 1800w, https:\/\/images.theconversation.com\/files\/486318\/original\/file-20220923-10743-gnurwo.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=535&amp;fit=crop&amp;dpr=1 754w, https:\/\/images.theconversation.com\/files\/486318\/original\/file-20220923-10743-gnurwo.png?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=535&amp;fit=crop&amp;dpr=2 1508w, https:\/\/images.theconversation.com\/files\/486318\/original\/file-20220923-10743-gnurwo.png?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=535&amp;fit=crop&amp;dpr=3 2262w\" data-sizes=\"(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" class=\"lazyload\"><\/a><figcaption>\n              <span class=\"caption\"><\/span><br \/>\n              <span class=\"attribution\"><a class=\"source\" href=\"https:\/\/ifs.org.uk\/articles\/mini-budget-response\">IFS<\/a><\/span><br \/>\n            <\/figcaption><\/figure>\n<p>First, the highlights. The increase in national insurance is being cancelled, the highest rate of income tax and the cap on bankers\u2019 bonuses abolished, and the basic rate of income tax cut from 20% to 19% in April. Stamp duty on house purchases is also being cut, especially for first-time buyers. <\/p>\n<p>The hike in corporation tax scheduled for April will not now go ahead, while a variety of other incentives are being introduced to stimulate investment and reduce the burden of regulation, including lower taxes for the self-employed. Added together, these measures will cost \u00a345 billion per year. <\/p>\n<p>In addition, the government is spending a huge amount to keep energy bills down. Moderating the planned rises for households will cost an estimated \u00a360 billion per year for the next two years, together with circa \u00a330 billion to help businesses in the next six months. The actual cost will depend on future gas prices. <\/p>\n<h2>Growth dividend?<\/h2>\n<p>The evidence is inconclusive as to whether lower tax rates always incentivise individuals to work harder and unleash their entrepreneurial spirit. In the UK, many may use the extra cash to enjoy more leisure time \u2013 particularly with the number of people in the workforce <a href=\"https:\/\/www.reuters.com\/world\/uk\/britains-shrunken-workforce-hampers-covid-recovery-2022-05-26\/\">substantially reduced<\/a> since the pandemic, especially those over 50. <\/p>\n<p>Meanwhile, the fact that poorer people are set to gain relatively little from the tax cuts may explain why the government is <a href=\"https:\/\/www.theguardian.com\/politics\/2022\/sep\/21\/kwasi-kwarteng-to-shrink-part-time-work-benefits-to-grow-labour-supply\">planning to<\/a> sanction those who work fewer than 15 hours a week and are not actively seeking jobs. <\/p>\n<p>Ironically, in the wake of Brexit the government also sees increased migration as a way to increase economic growth by adding more workers to the economy. However, increasing the size of the workforce does <a href=\"https:\/\/www.oecd.org\/sdd\/productivity-stats\/40526851.pdf\">not necessarily boost productivity<\/a> (output per worker) \u2013 the key to higher incomes. <\/p>\n<p>Most likely, the incentives for business investment will therefore be crucial to achieving any step-change in growth, together with <a href=\"https:\/\/www.cityam.com\/budget-government-to-invest-3bn-in-skills-and-education\/\">previously announced plans<\/a> to raise skills. <\/p>\n<p><strong>UK GDP growth 1949-2021<\/strong><\/p>\n<figure class=\"align-center \">\n            <img decoding=\"async\" alt=\"UK GDP growth\" data-src=\"https:\/\/images.theconversation.com\/files\/486317\/original\/file-20220923-17-grmc16.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip\" data-srcset=\"https:\/\/images.theconversation.com\/files\/486317\/original\/file-20220923-17-grmc16.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=368&amp;fit=crop&amp;dpr=1 600w, https:\/\/images.theconversation.com\/files\/486317\/original\/file-20220923-17-grmc16.png?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=368&amp;fit=crop&amp;dpr=2 1200w, https:\/\/images.theconversation.com\/files\/486317\/original\/file-20220923-17-grmc16.png?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=368&amp;fit=crop&amp;dpr=3 1800w, https:\/\/images.theconversation.com\/files\/486317\/original\/file-20220923-17-grmc16.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=462&amp;fit=crop&amp;dpr=1 754w, https:\/\/images.theconversation.com\/files\/486317\/original\/file-20220923-17-grmc16.png?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=462&amp;fit=crop&amp;dpr=2 1508w, https:\/\/images.theconversation.com\/files\/486317\/original\/file-20220923-17-grmc16.png?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=462&amp;fit=crop&amp;dpr=3 2262w\" data-sizes=\"(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" class=\"lazyload\"><figcaption>\n              <span class=\"caption\"><\/span><br \/>\n              <span class=\"attribution\"><a class=\"source\" href=\"https:\/\/www.statista.com\/statistics\/281734\/gdp-growth-in-the-united-kingdom-uk\/\">Statista<\/a><\/span><br \/>\n            <\/figcaption><\/figure>\n<p>Business investment <a href=\"https:\/\/www.reuters.com\/business\/weak-investment-innovation-management-hamper-uk-productivity-2021-11-15\/\">in the UK<\/a> has been <a href=\"https:\/\/www.instituteforgovernment.org.uk\/sites\/default\/files\/publications\/business-investment.pdf\">historically much lower<\/a> than that of its main competitors. However, successive cuts to corporation tax have made little difference. <\/p>\n<p>The same goes for the many previous schemes to incentivise specific investments, including the Johnson government\u2019s \u201csuper-deduction\u201d for investment in plant and machinery. <\/p>\n<p>With Kwarteng\u2019s business incentives also including new low-tax investment zones and planning reform, it remains to be seen whether this will make much difference. With a looming recession, high inflation, the energy crisis, supply shortages and difficulties in recruiting skilled workers, it is hard to envisage a dramatic shift in the short term. <\/p>\n<h2>The public finances<\/h2>\n<p>The government has suggested that if it succeeds in its objective of boosting annual growth by one percentage point by 2026-27, there could be an extra \u00a347 billion in tax revenues. This is a preliminary forecast which has not yet been scrutinised by its Office for Budget Responsibility. <\/p>\n<p>Yet in the short term, a big squeeze on public spending is on the cards. The Institute for Fiscal Studies <a href=\"https:\/\/www.heraldscotland.com\/politics\/22477621.tories-set-borrow-100bn-year-fund-cuts-spending\/\">estimates that<\/a> the effect of inflation will be to cut departmental budgets in real terms by \u00a318 billion compared to what was planned in the last spending review, and that is before public sector pay increases. <\/p>\n<p>The Treasury\u2019s own <a href=\"https:\/\/assets.publishing.service.gov.uk\/government\/uploads\/system\/uploads\/attachment_data\/file\/1105989\/CCS207_CCS0822746402-001_SECURE_HMT_Autumn_Statement_2022_BOOK_Web_Accessible.pdf\">Growth Plan 2022<\/a> says that \u201ckeeping spending under control\u201d is a key part of its commitment to fiscal responsibility.<\/p>\n<p>Regardless, the planned \u00a390 billion in energy subsidies and \u00a345 billion in tax cuts will deliver an enormous stimulus to the economy. To curb the extra inflationary pressures that this will exert, the government will be counting on the Bank of England to keep raising interest rates sharply. But it is not clear how the tension between these two objectives will play out. <\/p>\n<p>Equally unsettling is the fact that the measures are set to raise the government\u2019s deficit from \u00a3100 billion to nearly <a href=\"https:\/\/ifs.org.uk\/articles\/mini-budget-response\">\u00a3200 billion<\/a> next year, or almost 10% of GDP. This raises the prospect of UK government debt continuing to rise as a proportion of GDP in the medium term. <\/p>\n<p><strong>UK government debt as a % of GDP<\/strong><\/p>\n<figure class=\"align-center zoomable\">\n            <a href=\"https:\/\/images.theconversation.com\/files\/486304\/original\/file-20220923-13738-u3iw96.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip\"><img decoding=\"async\" alt=\"UK public debt as a % of GDP\" data-src=\"https:\/\/images.theconversation.com\/files\/486304\/original\/file-20220923-13738-u3iw96.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip\" data-srcset=\"https:\/\/images.theconversation.com\/files\/486304\/original\/file-20220923-13738-u3iw96.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=340&amp;fit=crop&amp;dpr=1 600w, https:\/\/images.theconversation.com\/files\/486304\/original\/file-20220923-13738-u3iw96.png?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=340&amp;fit=crop&amp;dpr=2 1200w, https:\/\/images.theconversation.com\/files\/486304\/original\/file-20220923-13738-u3iw96.png?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=340&amp;fit=crop&amp;dpr=3 1800w, https:\/\/images.theconversation.com\/files\/486304\/original\/file-20220923-13738-u3iw96.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=427&amp;fit=crop&amp;dpr=1 754w, https:\/\/images.theconversation.com\/files\/486304\/original\/file-20220923-13738-u3iw96.png?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=427&amp;fit=crop&amp;dpr=2 1508w, https:\/\/images.theconversation.com\/files\/486304\/original\/file-20220923-13738-u3iw96.png?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=427&amp;fit=crop&amp;dpr=3 2262w\" data-sizes=\"(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" class=\"lazyload\"><\/a><figcaption>\n              <span class=\"caption\"><\/span><br \/>\n              <span class=\"attribution\"><a class=\"source\" href=\"https:\/\/www.tradingview.com\">TradingView<\/a><\/span><br \/>\n            <\/figcaption><\/figure>\n<p>The government argues that over five years, if its strategy boosts growth, it would add billions of pounds to tax revenues to service the debt, as well as increasing the overall size of the economy and therefore reducing the debt-to-GDP rate. The markets have nevertheless <a href=\"https:\/\/www.ft.com\/content\/e4a95eac-71bc-4da9-b029-200764179d0c\">reacted with concern<\/a>, dumping UK government bonds and the pound after the announcement. <\/p>\n<h2>Where this leads<\/h2>\n<p>The government is clear that its reforms will only deliver benefits over the medium term. But short-term economic problems could derail the plan and threaten the chances of an election victory \u2013 most likely due to be contested in 2024. <\/p>\n<p>The model of Liz Truss\u2019s new government rehashes the strategy of the Thatcher government in the 1980s, where tax cuts and deregulation arguably helped to boost growth. But tax rates were much higher then, and the size of the state industrial sector was much larger. <\/p>\n<p>A more worrying comparison, where the \u201cdash for growth\u201d foundered over short-term economic problems, might be the \u201c<a href=\"https:\/\/www.ruffer.co.uk\/en\/thinking\/articles\/market-views\/2022-09-barber-boom\">Barber boom<\/a>\u201d introduced by the 1970-74 Conservative government. A huge economic stimulus led to soaring inflation, public sector pay strikes, and a foreign exchange crisis, leading to the government\u2019s defeat in the 1974 election.<\/p>\n<p>This is a dramatic shift in government policy that faces many obstacles. There may well be a rocky road ahead before we see whether this gamble on growth yields the result that its proponents are promising.<!-- Below is The Conversation's page counter tag. Please DO NOT REMOVE. --><img decoding=\"async\" data-src=\"https:\/\/counter.theconversation.com\/content\/191285\/count.gif?distributor=republish-lightbox-basic\" alt=\"The Conversation\" width=\"1\" height=\"1\" style=\"--smush-placeholder-width: 1px; --smush-placeholder-aspect-ratio: 1\/1;border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important\" referrerpolicy=\"no-referrer-when-downgrade\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" class=\"lazyload\" \/><!-- End of code. If you don't see any code above, please get new code from the Advanced tab after you click the republish button. The page counter does not collect any personal data. More info: https:\/\/theconversation.com\/republishing-guidelines --><\/p>\n<p><span><a href=\"https:\/\/theconversation.com\/profiles\/steve-schifferes-181051\">Steve Schifferes<\/a>, Honorary Research Fellow, City Political Economy Research Centre, <em><a href=\"https:\/\/theconversation.com\/institutions\/city-university-of-london-1047\">City, University of London<\/a><\/em><\/span><\/p>\n<p>This article is republished from <a href=\"https:\/\/theconversation.com\">The Conversation<\/a> under a Creative Commons license. Read the <a href=\"https:\/\/theconversation.com\/mini-budget-will-kwasi-kwartengs-plan-deliver-growth-191285\">original article<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Steve Schifferes, City, University of London The UK economy has been dogged by slow growth for a long time. Combined with even slower growth<a class=\"moretag\" href=\"https:\/\/mpelembe.net\/index.php\/mini-budget-will-kwasi-kwartengs-plan-deliver-growth\/\">Read More&#8230;<\/a><\/p>\n","protected":false},"author":1,"featured_media":786,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"googlesitekit_rrm_CAowu7GVCw:productID":"","_crdt_document":"","activitypub_content_warning":"","activitypub_content_visibility":"","activitypub_max_image_attachments":3,"activitypub_interaction_policy_quote":"anyone","activitypub_status":"","footnotes":""},"categories":[9],"tags":[722,1905,1903,56,1298,1899,1907,1902,1904,1906,1848,725,723,1901],"class_list":["post-785","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economy","tag-creative-commons","tag-deficit-reduction-in-the-united-states","tag-economic-growth","tag-economy","tag-economy-of-the-united-kingdom","tag-government","tag-kwasi-kwarteng","tag-presidency-of-barack-obama","tag-reaganomics","tag-steve-schifferes","tag-tax","tag-the-bank-of-england","tag-united-kingdom","tag-united-kingdom-national-debt"],"featured_image_src":"https:\/\/mpelembe.net\/wp-content\/uploads\/2022\/09\/unnamed-4.jpg","blog_images":{"medium":"https:\/\/mpelembe.net\/wp-content\/uploads\/2022\/09\/unnamed-4-300x200.jpg","large":"https:\/\/mpelembe.net\/wp-content\/uploads\/2022\/09\/unnamed-4.jpg"},"ams_acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Mini budget: will Kwasi Kwarteng\u2019s plan deliver\u00a0growth? 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